Like most firms in its industry, Culinary Cafe uses a subjective risk assessment tool of its own design. The tool is a simple index by which projects are ranked by level of perceived risk on a scale of 0 to 10. The scale is re-created in the following table.

The firm is analyzing two projects based on their RADRs. Project Pita requires an initial investment of $12,500 and is assigned a risk index of 6. Project Grape Leaf requires an initial investment of $7,500 and is assigned a risk index of 8. The two projects have 7-year lives. Pita is projected to generate cash inflows of $5,500 per year. Grape Leaf is projected to generate cash inflows of $4,000 per year. Use each project’s RADR to select the better project.

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Risk index Required return 4.0% (current risk-free rate) 4.5 5.0 3 5.5 4 6.0 6.5 (current IRR) 5 7.0 7.5 8.0 8.5 9.0 10